By Ewen Fleming, Partner, Financial Services Advisory (Banking), Grant Thornton UK LLP.
What can banks and building societies do to deliver high savings rates while still meeting their conduct obligations, and is it fair to accuse them of giving customers a raw deal?
Savers have been dealt another blow as inflation has dropped to record lows of 0.3% in early 2015. Falling prices of food and fuel have been the main drivers, although we have also seen the Retail Prices Index (RPI) dropping to 1.1%, adding to the downward pressure on inflation. This is generally considered good news for consumers and the value of their money; however it will likely translate into further pressure on savers who are generating low returns from their nest eggs.
In January the FCA came out saying that savers are “getting a raw deal” and have been let down by the High Street Banks.
In particular, the FCA found around £160bn of the funds held in easy access savings accounts earned an interest rate equal to or lower than the Bank of England base rate of 0.5% in 2013, yet consumers often find it difficult to know what rate they are on, or are put off switching by the expected inconvenience. 80% of easy access accounts have not been switched in the last three years.
In the context of ongoing reputational issues faced by financial institutions, brought on by high profile cases of misconduct and unethical behaviour; the public may find it is easy to pin low savings rates as the fault of the banks. But are they being unfairly criticised?Is it within their gift to increase rates given the economy they are operating in and the regulatory obligations they are expected to adhere to?
Banks often come under fire for driving profit and the public is quick to villainise banks for appearing to rake in profits while the rest of the economy struggles to recover. In reality a strong and stable financial sector benefits the wider economy in a number of ways: financial institutions need to be able to attract investors and then reward those shareholders for their investment and the government needs a profitable financial sector for a healthy economy.
Banks making sustainable profits while serving their customers with the advice and products they need is a good thing although that balance is becoming harder to achieve.
A Challenging Economic and Regulatory Environment
The official bank rate has been at an unprecedented low of 0.5% since 2009.Consumer confidence is only slowly improving  and the improved employment figures have not yet translated into economic activity. Some of this be could the impact of increasing life expectancy and therefore retirement periods, forcing consumers to spend less now and save more to cushion them in later years 
The Government’s Funding for Lending Scheme has provided lenders with a cheap source of funding making them less reliant on savings deposits and enabling them to slash savings rates.
The FCA’ s Customer Conduct Agenda compels financial institutions to keep their customer’s interests front of mind. They are expected to treat customers fairly, often demonstrated through helping customers understand the benefits and risks of products, providing clear information and good service. Government has added pressure by urging banks to keep the “last branch in town” open providing access to banking in rural communities.
This makes for a challenging economic and regulatory environment for banks to operate in, whilst remaining profitable.
The Regulator would like to see firms focus on core banking activities and move away from complex securitisation models. The impending ring-fencing deadline will mean that retail banks will be even more dependent on traditional banking activities as their income will no longer be subsidised by their investment banking arm.
A retail bank or building society’s chief source of income is Net Interest Income (NII). In its most basic form; the differential between the rate earned on loans and the rate paid on savings. If the official rate remains at 0.5%; what levers do these organisations have available to them to improve margins and profits, improve savings rates and maintain their obligations to the customer?
Traditional Tools Are No Longer Effective
Differential Pricing per delivery channel
Until recently, banks were able to differentiate pricing based on the delivery channel and customers accepted the value distinction between channels. Customers who demand the security of face-to-face interactions have traditionally accepted the trade-off of earning less on savings products sold and serviced through the branch network while banks have heavily marketed “online only” deals to entice customers to purchase products via the internet.
An omni-channel world has now decoupled products and channels. A multi-tier pricing system will only serve to alienate customers who are now comfortable using more than one channel and will likely discover that they are able to get the same product at a better price had they gone online instead of walking into a branch.
Although the FCA has frowned on the use of bonus or teaser rates – attractive,but temporary rates used to entice savers – they failed to ban the practice altogether. However “large back books that may lead banks to act against their existing customers” was cited as one of the seven forward looking areas of focus in the FCA 2014 Risk Outlook Statement and we expect this to be an area of high priority to the Regulator.
We have already seen the Royal Bank of Scotland curtail their use of teaser rates offered with savings and credit card products. CEO Ross McEwan, is quoted as saying “You would have thought you would get a better rate for staying, rather than a worse rate for staying and a better rate for going,” The removal of teaser rates and front and back book differential pricing changes the economics considerably.
The easiest way to generate new business and income is to offer existing customers more products. Repeat customers tend to spend more, cost less to acquire and are more loyal to the brand. Every bank competes to own as much of their customers’ wallet as possible.
The PPI mis-selling scandal has cost the industry millions and subsequent remediation and fines on PPI and other cross sold products has made firms rightfully wary of pushing products on customers who don’t understand what they are. Cross selling and bundling products makes it difficult for customers to compare across competitors and allows banks to mask costs and justify lower rates of returns.
Calls for greater transparency and accountability in this area mean that financial service providers are now required to evidence that products have been sold fairly and that the product is deemed suitable for the customer’s need. This is known as an advised sales process and has made selling more complex and costly to provide and to evidence they have delivered this compliantly.
Lend more for more
The ability to increase lending rates and fund this lending with cheap savings is the most powerful lever for banks and building societies to widen the NII margin. When demand for loans is strong, backed by a growing economy, firms typically acquire new savings by offering higher rates. However many of the high street brands are finding it difficult to lend money out. Within the existing regulatory framework banks are incentivised to lend to low risk borrowers and there just aren’t as many of them out there as the banks would like to hear from.
Metro Bank is testament to that and in its financial statements to 31 December 2014 the bank reported deposits of £2,867 million compared to total loans of £1,597 million. Despite the imbalance,Metro Bank deposits are still growing marginally faster than loans and this is despite a focus on lending to business customers who now make up almost half of its total lending.
Where to from here?
As discussed, banks and building societies are not in a position to easily widen the NII margin using traditional levers.
Given NII margins are being squeezed, where can these organisations compensate for the short-fall while imbibing the values encouraged by the FCA?
The fee debate
The debate continues about whether or not banks should charge fees on current accounts. A fee structure will help create transparency and facilitate competition as customers would be able to compare products like for like. It seems inevitable that UK banks will eventually follow many of their international peers and introduce a fee structure for basic transactional accounts.
However the introduction of fees will cause an upset and given the current public opinion, manymay choose to tread cautiously in this area.
Change the business model
The reality that a low interest rate environment might be here to stay, means that financial service providers need to abandon short term fixes to keep them afloat and rather, commit to fundamentally changing their business model.
Disruptive and innovative change is required.
One such example is committing and wholeheartedly embracing the digital agenda that so many organisations have been toying with over the last decade or more.
A digital bank; one that moves beyond digital channels and strives for a digital, integrated core will be able to realise long term cost efficiencies that will translate into operational savings and can eventually have a positive impact on rates; all the while keeping the customer at the heart of the business.
So perhaps the debate rightfully moves to cost:income ratios once more, but focused on slashing costs without sacrificing levels of service or operations. The tricky balance for organisations will be to simultaneously keep customers’ welfare at the heart of their operations, offera great customer experience and increase returns for their investors.
Many banks are standing on the edge of the proverbial “burning platform”; there has been enough debate andthe survivors will be the ones who make the decision to jump into and embrace the new world order. The ones who jump soonest and execute with excellence will be the ones that prosper.
Office for national Statistics http://ons.gov.uk/ons/rel/cpi/consumer-price-indices/january-2015/consumer-price-inflation-summary–january-2015.html
 Consumers with cash savings need better information and easier switching. http://www.fca.org.uk/news/consumers-with-cash-savings-need-better-information
Andy Haldane; Bank of England Chief Economist. http://www.telegraph.co.uk/finance/personalfinance/interest-rates/11251615/Workers-saving-for-retirement-keeping-interest-rates-low.html
FCA 2014 Risk Outlook Statement. http://www.fca.org.uk/your-fca/documents/corporate/fca-risk-outlook-2014
FT.com Monday interview: Ross McEwan, Royal Bank of Scotland. http://www.ft.com/cms/s/0/1605e4b8-ad40-11e4-a5c1-00144feab7de.html#axzz3S77nVjG8
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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